Essays on market design and regulation in electricity systems

This thesis discusses market design and regulation in electricity systems, focusing on the information exchange of the regulated grid firm and the generation firms as well as the regulation of the grid firm. In the first chapter, an economic framework is developed to consistently analyze different market designs and the information exchange between the grid firm and the generation firms. Perfect competition between the generation firms and perfect regulation of the grid firm is assumed. A numerical algorithm is developed and its feasibility demonstrated on a large-scale problem. The effects of different market designs for the Central Western European (CWE) region until 2030 are analyzed. In the second chapter, the consequences of restricted grid expansion within the current market design in the CWE region until 2030 are analyzed. In the third chapter the assumption of efficient markets is modified. The focus of the analysis is then, whether and how inefficiencies in information availability and processing affect different market designs. For different parameter settings, nodal and zonal pricing are compared regarding their welfare in the spot and forward market. In the fourth chapter, information asymmetries between the regulator and the regulated firm are analyzed. The optimal regulatory strategy for a firm, providing one output with two substitutable inputs, is defined. Thereby, one input and the absolute quantity of inputs is not observable for the regulator. The result is then compared to current regulatory approaches.

Essays in Energy Economics

This thesis presents four essays in energy economics. The first essay investigates one of the workhorse models of resource economics, the Hotelling model of an inter-temporally optimizing resource extracting firm. The Hotelling model provides a convincing theory of fundamental concepts like resource scarcity, but very few empirical validations of the model have been conducted. This essay attempts to empirically validate the Hotelling model by first expanding it to include exploration activity and market power and then using a newly constructed data set for the uranium mining industry to test whether a major resource extracting mining firm in the industry is following the theory’s predictions. The results show that the theory is rejected in all considered settings. The second and third essays investigate the difference in market outcomes under spot-market based trade as compared to long-term contract based trade in oligopolistic markets with investments. The second essay investigates analytically the difference in market outcomes in an electricity market setting, showing that investments and consumer welfare may be higher under spot-market based trade than under long-term contracts. The third essay proposes techniques to solve large-scale models of this kind, empirically, by exploring the practicability of this approach in an application to the international metallurgical coal market. The final essay investigates the influence of policy uncertainty on investment decisions. With France debating the role of nuclear technology, this essay analyses how policy uncertainty regarding nuclear power in France may feature in the French and European power sector. Applying a stochastic model for the European power system, the analysis shows that the costs of uncertainty in this particular application are rather low compared to the overall costs of a nuclear phase-out.